Pakistan’s economy is struggling to revive and is not moving in the right direction for the last few years. There is a consensus that structural reforms, prudent macroeconomic policies, financial discipline and consistency and continuity in policies can only transform Pakistan’s economy into a stable and resurgent economy.
Pakistan’s exports to GDP ratio stands in around 9.06 percentage which is quite low as compared to Indonesia, Philippines; Thailand; Vietnam; or Malaysia. This means that Pakistan lags in generating enough cash as compared to other comparable countries. Pakistan’s export performance was impressive in 2021-22 and touched the highest level of USD 31.80 billion. Exports of 2021-22 was USD 6 billion higher than 2020-21, which was unprecedented. Exports were dropped to USD 27.73 billion in fiscal year 2022-23. The growth in exports was mainly due to COVID related orders.
Pakistan’s exports to European nations witnessed a 12 per cent decline in the first quarter of the current fiscal year compared to the same period last year, primarily due to a reduced demand for Pakistani goods in western and northern Europe. In FY23, the export of EU dropped 4.41 per cent to USD 8.2 billion from USD 8.6 billion in the preceding fiscal year. However, the decline in exports was seen despite the Generalised System of Preferences Plus (GSP+) scheme. The scheme became effective on 1 Jan 2014, and it will remain available to Pakistan for the current fiscal year. The decline in exports to the UK is a discouraging factor though Germany is replacing UK for Pakistan’s export. However, exporters fear they will lose the UK market following Brexit. The British government, however, has assured Pakistan of no change in the post-Brexit scenario, which is evident from the inclusion of Pakistan in its preferential market access scheme.
The excess of imports over export, or trade deficit, has received considerable attention from policy makers. Increasing trade deficit is a natural consequence of fiscal imbalances. The business community has expressed their apprehension about the trade deficit. It is expected that the trade deficit may increase during the current fiscal year and it would be difficult for the government to achieve the export target.
Pakistan’s annual trade deficit for 2023-24 is increasing because of food import bills and fluctuations in the prices of crude oil in the global market. The growing trade deficit, experts say would not only put pressure on foreign exchange reserves but would also make more inflation because the country imports a number of food items to meet its domestic needs. Many fear that Pakistan is increasingly becoming an import dependent country with a growing list even of food items, despite being an agricultural country for decades.
Since 90’s a lot of emphasis has been placed on the reliance of the private sector. But, in the current situation, it is important for the private sector to take the lead in economic growth. Export is critical for a variety of reasons. First, the export sector usually has a high rate of profits. Their profits are high because they produce for world market and therefore achieve greater economies of scale and production efficiency. Second, the export sector generates foreign exchange earnings and overcomes the foreign resource constraints for greater imports. Third, exports and particularly manufactured exports are highly employment intensive. An increase in exports creates jobs for workers directly engaged in the production of the exported commodities. If raw materials and machinery used in such production are supplied by domestic industries, increased demand for their products creates more employment.
Finally, higher export growth helps achieve higher economic growth. Given the apparent importance of exports in the economic transformation of nations, the ability to achieve strong export growth has become vital for Pakistan’s overall economic progress and prosperity of the nation. Broad categories of exports suggest that with the exception of textile manufactures, all other categories of exports registered growth.
Textile exports are suffering from structural issues as always, which need to be addressed by the industry itself. The government provides financial support to the textile sector through R & D but few of the textile owners use this as per the requirement. Apart from raw cotton and other textile materials, all other major components of textile manufacturing registered negative growth.
Textile is the backbone of Pakistan’s exports but bears various tribulations. These include: (i) low value added and poor quality products fetching low international prices; (ii) the machinery installed in recent years has depreciated considerably relative to Pakistan’s competitors; (iii) these machines are power-intensive, less productive and carry high maintenance cost; (iv) augmented wastage of inputs adding to the cost of production; (v) little or no efforts on the part of industry to improve their workers’ skills; (vi) industry spending less money on research and development; and (vii) export houses lacking capacity to meet bulk orders as well as meeting requirements of consumers in terms of fashion, design and delivery schedule..
Role of the private sector
The first thing that the private sector must do is to improve their competitiveness by employing state of the art machinery; through better management; through cost effectiveness; and by improving their working environment. The second most important task that the private sector must undertake is to look for new markets and new products. Today our exports are highly concentrated in few items and going into few markets. More than 75 percentage of the exports originate from four items, namely cotton, rice, leather and sports goods.
Similarly, more than one-half of our exports go to 7 countries in the world. This state of affairs will not take us at higher export path. Diversification of exports, both in terms of commodities and regions, will be needed. For new markets, we need to look at China, Japan, Latin America and in ASEAN Region. A more diversified export mix may enable the country to accomplish stability and growth-oriented policy goals. Further, by providing a broader export base, replacing commodities with positive price trends and adding value to commodities through additional processing and marketing, a diversified export portfolio would be expected to minimize the volatility in export earnings and to foster economic growth. It is also suggested that export diversification initiatives need to be undertaken within a broad policy approach where the government should design and support a coherent macroeconomic policy framework consistent with export promotion strategies. While export diversification programs should be implemented primarily by the private sector, the role of the government, in this context, should be to prevent distortion and create an environment which promotes diversification.
Role of the government
The government should play its supporting role in achieving the objectives of raising exports. The first and foremost duty of the government is to provide a strong macroeconomic environment, an environment where exchange rates should be stable; a comfortable foreign exchange reserves; low cost of capital; low inflation, low budget deficit and consistent macroeconomic policies. Whereas in reality, rupee is not stable, inflation is out of control, electricity cost is very high, the cost of capital/debt is all time high. The second most important duty of the government is to provide strong infrastructure, transport & communication, roads & highways, power, well-functioning ports etc. In highly competitive international markets, poor and overstretched infrastructure facilities can greatly limit the potential gains from an export-oriented trade regime. Buyers in the international market have a range of alternative suppliers, and they value dependability of on-time delivery, ease of communications with their suppliers, and other attributes that exports can only achieve if infrastructure is adequate. The third most important duty of the government is to enter an active trade diplomacy. Our Commercial Attaché in Embassies abroad have to change their attitude.
Institutions can also play an important role in increasing exports. East Asia is full of examples as to how their institutions have succeeded in enhancing exports. The case of Malaysia is before us. The main features of their success have been the level of professionalism of their agencies responsible for export promotion. We need to reorganize and strengthen our export government departments by inducting trained and skilled professionals. There is also a need to establish more Export Processing Zones (EPZs).
It is also vital for the economy to look for FDI in the export sector. This is what we need to pursue. It is generally observed that exporters sometime demand the government to pursue discriminatory policies in favor of their exports and provide them with adhoc incentives for export promotion. Historic analysis suggests that discriminatory policy and adhoc incentives to promote exports have not worked on a sustained basis. Therefore, it is not appropriate to pursue discriminatory policies.
Falling exports and the staggering trade deficit of Pakistan has reached an alarming level. But it is a matter of great concern that despite the enormous potential and attractive business opportunities in Pakistan, the potential investors did not come out with money at the desired level due to various reasons, especially the unpredictable policies, political unrest and law and order situation in the country. Therefore, the government should play its role in stabilizing the political environment and play the role of a facilitator. While the private sector must take the lead in materializing polices. Together they can transform Pakistan into an export-oriented country. Export is Pakistan’s future.